Risk Propagation through Payment Distortion in Supply Chains

2018. Journal of Operations Management, 58-59: 1-14

41 Pages Posted: 12 Nov 2010 Last revised: 19 Jul 2018

See all articles by Alejandro Serrano

Alejandro Serrano

MIT Zaragoza International Logistics Program

Rogelio Oliva

Mays Business School, Texas A&M University

Santiago Kraiselburd

MIT Zaragoza International Logistics Program; INCAE Business School

Date Written: December 22, 2017

Abstract

The supply chain literature has devoted much attention to studying how the variability of orders propagates upstream. We explore how this insight extends to the variability of payments to suppliers and its impact on how risk is generated and propagates upstream. To do so, we model the financial features of a supply chain based on industry reports and empirical findings from the finance literature. Capturing policies and constraints of the agents in the supply chain in a formal model, we are able to generate and explain the behavior observed in real supply chains. We show that payment variability occurs and propagates, even if orders are constant, in a cash-constrained supply chain. Furthermore, our model reveals that payment variability may even become amplified under severe cash restrictions. We identify the factors that drive the propagation of variability-the industry risk, the firm's operational leverage, the existence of a financial leverage target, and the cost of debt. The model also makes it possible to explore states of nature not often observed in practice, but that may have an effect in managers' behavior, for example, bankruptcies. We numerically illustrate the impact of these drivers on the risk of upper echelons (suppliers and suppliers' suppliers) as well as the interactions between order and payment variability. We close by summarizing our findings and discussing future research opportunities.

Keywords: risk, bullwhip effect, credit contagion, supply chain management, empirical modeling, operations management-finance link

Suggested Citation

Serrano, Alejandro and Oliva, Rogelio and Kraiselburd, Santiago, Risk Propagation through Payment Distortion in Supply Chains (December 22, 2017). 2018. Journal of Operations Management, 58-59: 1-14. Available at SSRN: https://ssrn.com/abstract=1707728 or http://dx.doi.org/10.2139/ssrn.1707728

Alejandro Serrano (Contact Author)

MIT Zaragoza International Logistics Program ( email )

C/ Bari 55
Edificio Náyade 5 (PLAZA)
Zaragoza, Zaragoza 50197
Spain

Rogelio Oliva

Mays Business School, Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4218
United States

Santiago Kraiselburd

MIT Zaragoza International Logistics Program ( email )

Avenida Gomez Laguna 25
Zaragoza, 50009
Spain

INCAE Business School

Alajuela
Costa Rica

HOME PAGE: http://www.incae.edu

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